From Samoa to Papua New Guinea to Vanuatu, the story is the same where it concerns the impact of the global financial crisis.
It’s very much a wait-and-see approach, the general tone being that it is too early to tell just what exactly this crisis will do to economies in the region. The central banks in the Pacific have been keeping a close watch on developments in the major markets, with a number of them issuing special statements in October.
They are echoing what has been said by donor agencies such as the Asian Development Bank. That, on the one hand, Pacific banks are insulated and hardly in the line of fire, meaning that the availability of finance locally is not going to be much of a problem, unlike what has been happening in the big markets. On the other hand, the Pacific’s export industries, tourism, remittances and overseas investments by local trust funds and superannuation schemes are going to feel the pinch because they rely directly on the health of the Pacific’s main trading partners, whose troubled economies are expected to slow down considerably.
Then there is the price of food and oil—crucial issues for import-dependent Pacific. Only a few months ago, the runaway food and oil prices were the subject of much concern for governments across the region. Pacific islanders watched helplessly from their homes as commodity markets in the world’s major trading centres dished out dosages of price increases.
For many countries in the region, this had meant higher import costs that ate away at their foreign exchange reserves like never before in their history. But as the financial collapse in the United States reverberated throughout the chain of major financial markets, Pacific islands countries are at least breathing a little easier.
Their central banks are immediately listing down some notable good that their countries can get out of this crisis, although there are major shocks to expect. Among the good is that inflation will generally ease.
Global market turbulence: In Vanuatu for instance, the Reserve Bank of Vanuatu (RBV) is of the view that the crisis will bring it lower oil and petroleum prices while the depreciation of Australian and New Zealand currencies will mean cheaper imports from those countries and would in turn dampen inflation for them.
In his statement in October, RBV’s deputy governor, Peter Tari said: “The global financial market turbulence is still unfolding and it is difficult to assess what the full impact will be on the Vanuatu economy at this stage.
Bank South Pacificin Nadi...Global credit crunch
is an issue closely monitored by the Pacific
“The extent to which the domestic economy will be affected depends on the inter-linkages between the Vanuatu economy and the rest of the world. The fact that the linkages are not as strong as in some other countries will itself help in cushioning the impact of the crisis.”
Vanuatu’s economy, Tari added, enjoyed strong economic fundamentals and macroeconomic stability.
“Real economic growth is estimated to be around 6.5 percent in 20007 and is projected to experience further growth this year,” he said. “The level of foreign reserves are healthy and currently stands at 7.3 months of import cover.”
In Samoa, there is a favourable outlook on its exports, destined mainly for the US and Japan.
The Central Bank of Samoa’s (CBS) October-end information update saw it putting a tick on the local financial system as being safe and insulated. It had been trekking on a path of easy monetary policy, where interest rates were kept low to encourage local borrowings.
It felt no need to change that, signalling its confidence in the stability of the local financial system. For Samoa, the most immediate impact of the global crisis was felt on the exchange rate of the tala (local currency). The strengthening of the US dollar internationally as investors seek its safety was having a bearing on the Samoa tala.
“Being linked to a trade-based basket of currencies, dominated by the US dollar, the appreciation of the US dollar has also driven up the value of the Samoan tala against most other currencies in the basket, except for the US dollar,” said CBS.
In the two months to the end of October 2008, the US dollar appreciated by 10.4 percent against the tala. During the same period, the greenback appreciated by 21.9 percent and 14.3 percent against the Aussie and Kiwi dollars respectively.
“In turn, the tala appreciated significantly against the Australian dollar (up 14 percent) and New Zealand dollar (up 5.6 percent). On the other hand, the tala weakened against the Yen by 20.5 percent.”
The strong US dollar and Yen against the tala was seen as favourable to Samoa’s fish, nonu and other exports directed to American Samoa, the US mainland and Japan, as well as tourists from these markets visiting Samoa.
Declining inflation in the US and Japan was also seen as a big help, at least easing the burden through lower cost of imports sourced from those countries.
On the other hand, the weakening Australian and New Zealand dollars was good for import but bad for Samoa’s exports and tourism service to those countries.
The story was the same in resource-rich Papua New Guinea—local financial system was safe and exports were expected to fall. Its main exports are gold, copper, palm oil, timber and coffee.
Five ways to beat the global money crisis
Keep your eyes on the money. That’s one measure that governments in the Pacific could employ inorder to prepare themselves in these trying times when the global financial meltdown is taking its toll on every major economies in the world. It’s among the five policy responses suggested by the Asian Development Bank in its recently released publication titled: Navigating the Global Storm.
In the publication, the ADB outlined the possible impacts the turmoil would have on Pacific economies, in particular, its member countries in the region. The ADB’s tips on policy responses:
Consolidate the fiscal balance
“It is important that Pacific islands governments exercise fiscal conservatism. This would provide some fiscal space to respond to any downturn in economic growth and external shocks. While fiscal stimulus in the form of moderate budget deficits may ultimately be desirable to help manage any downturn in the region’s economies, it is too early for such a response—any capacity to relax fiscal policy should be held in reserve at this stage. Efforts to trim low priority expenditure and improve revenue collections are a sensible, quick response that will help protect fiscal positions and the ability of governments to respond when needed.”
Ease monetary policy
Some Pacific member countries of ADB with their own currencies and adequate foreign reserves can adopt an easing of monetary policy stance. For example, the reduction of interest rates, to try to stimulate growth. Dampening inflation in the international markets, the ADB said, justifies this measure.
Renew Banking surveillance
ADB said Pacific banks are well insulated but indirect effect will come through possible reduction in liquidity and a deterioration of loan quality as economic growth slows.
“Local regulators and financial supervisors, backed up by offshore supervision of the overseas banks that have set up operations in the Pacific, should maintain very close contact with the region’s financial institutions as the situation develops.
“Central banks should carefully monitor liquidity conditions and take action to inject further liquidity where necessary.”
Revisit the management
of offshore investments
The ADB said: “A mix of stocks, bonds and property investments in a range of international markets (developed and developing) provides a balanced portfolio and remains a sensible strategy for a long-term fund, despite the current financial shock. Recent events should not deter Pacific member countries from carrying the risk inherent in investments in offshore stocks.”
Reinvigorate structural reforms
The ADB also suggested that Pacific islands countries boost their structural reform efforts and prioritise on addressing constraints to private sector-led growth in their economies.
“The global financial crisis will have limited effects on the PNG economy,” said Wilson Kamit, Governor of the Bank of Papua New Guinea, in his special statement late October.
“The effects of the slowdown in economic growth in the major economies, including China and India, has resulted in declines in prices of export commodities. This would lead to lower production and export revenue as well as reduced tax revenue to the government.”
As well, the impacts of the weakening Australian dollar and the strengthening of US dollar on the kina were expected to have mixed results on PNG’s international trading.
Kamit said the likely impacts of the global economic slowdown to PNG were: a decline in the growth of PNG’s GDP; a reduction in export revenue; a reduction in government tax revenue; a fall in borrowers’ capacity to repay loans which would increase non-performing loans of commercial banks; a reduction of foreign direct investments for new resource-based projects; and a decline in PNG’s international competitiveness for its exports.
In light of the declining commodity prices worldwide and the impact on PNG’s related export revenue, the country is expecting growth to decline from 7.2 percent in 2008 to 6.2 percent next year. This had in turn affected its revenue projection for 2009, obvious in its 2009 national budget handed down in November. With other islands countries are telling similar stories, there is no doubt this has become an issue they will be closely monitoring in the months ahead.
The global financial crisis is, after all, coming to the Pacific at a time of slow economic growth, when the rising cost of fuel and food as well as the need for investments had been putting undue stress on foreign reserves.
